In this conversation, Vitalik discusses major shifts in the crypto industry, including proof-of-work vs. proof-of-stake, the recent crypto market crash, cryptocurrency security, decentralized governance, “cyber states”, and more.
Vitalik Buterin is one of the well-known and beloved figures in the crypto world, and the Ethereum he co-founded with Gavin Wood has become a leader in the entire Web3 world. It’s obvious that he’s a smart, friendly guy who just wants to create cool stuff and not fool anyone. In addition to being one of the face of cryptocurrencies, Vitalik also has an interesting Twitter account and a blog where he often provides deep and original views on various crypto topics.
As we said, Ethereum, which powers most of the smart contracts in the crypto world, is going through an epoch-making transformation. In a process called The Merge that is scheduled to be completed in two weeks, Ethereum is switching the way it validates transactions from proof-of-work (PoW) to proof-of-stake (PoS). This will enable the network to significantly reduce energy use and carbon emissions.
In the interview that follows, I discuss proof-of-work vs. proof-of-stake, the recent crypto market crash, cryptocurrency security, decentralized governance, “cyber-states,” and more with Vitalik.
Noah Smith: I think we should start with some current events. Almost all cryptocurrencies have collapsed in recent months. Why do you think this is the case? What impact will this have on the future of the blockchain ecosystem?
Vitalik: I’m actually surprised that the “crash” happened so late. Typically, a crypto bubble lasts about 6-9 months after a bull market top, and then quickly declines. This bull run has lasted for nearly a year and a half, and people seem to have developed a mentality that high cryptocurrency prices are the new normal.
All along, I’ve known that the bull market will eventually end and we’ll experience a decline, but I just don’t know when. It currently feels like people don’t know enough about the cyclical dynamics of cryptocurrencies. When prices rise, many say it’s the new paradigm and the future, and when prices fall, people say it’s doomed and fundamentally flawed.
I do think the price drop helps to “reveal” some of the problems that were there from the start. Unsustainable business models tend to be successful in good times, because everything is going up, so is the money people have at their disposal, so the model can be temporarily supported by the constant influx of new dollars.
During a crash, as we saw with Terra, this model is no longer valid. This is most prevalent in extreme situations like high leverage and Ponzi schemes (crypto players in 2017 will remember “BIT-CONNE-EEE-ECT!!!”), but also in more subtle ways, like during bull markets Developing a new protocol requires consideration of how easy it is to sustain high yields, and when prices plummet, it is often difficult for newly formed teams to sustain financially. Apart from my usual advice that people should remember crypto history and take a long-term view of this thing, I have no way of fighting these cyclicalities.
Editor’s Note: BIT-CONNE-EEE-ECT refers to the sudden announcement in January 2018 by Bitcoin investment lending platform BitConnect that it would be shutting down its lending and exchange services. At its peak, BitConnect had a market cap of over $2.6 billion and guaranteed monthly total returns for investors of up to 40%.
Noah Smith: Makes sense. Now please talk a little more about the financial aspect. For Bitcoin – the most widely held and traded cryptocurrency – we’ve seen this pattern, which has repeated quite regular bubbles and busts, but each boom has returned a lower percentage than the previous. To me, this looks like a curve – as more and more people hold cryptocurrencies, new users get less and less financial gain. Have we reached a stage where Bitcoin adoption is saturated and returns drop to gold levels?
Vitalik: I think that in the medium term to come, cryptocurrencies will stabilize and be only as volatile as gold or the stock market. The main question is at what level will the price of cryptocurrencies stabilize? In my opinion, a lot of the early volatility was related to the uncertainty of cryptocurrencies: in 2011, when Bitcoin fell from $31 to $2 in six months, people suspected that Bitcoin was just a fad and then crash forever. In 2014, this uncertainty is less than before, but it still exists. Then after 2017, the question of uncertainty shifted to the fact that cryptocurrencies could rise to higher prices, but only if they could gain the legitimacy they needed for mainstream acceptance.
Even though we’ve come a long way, this is still roughly 2022 levels. Over time, these existential problems will become more and more clear. If in 2040, cryptocurrency has solidly entered several market segments: it has replaced gold as a store of value share, it has become a kind of “financial Linux”, ubiquitous and readily available.
Alternative financial products become a really important goal of cryptocurrencies, but not to completely replace mainstream financial products, then the chances of it disappearing or completely taking over the world in 2042 will be much smaller, and individual events have a very large impact on this probability Small.
Some deadheads believe that the price of cryptocurrencies is trapped in a limited range (between zero and all the wealth of the world) where cryptocurrencies can only remain highly volatile for a very long time, until repeatedly buying high and low Selling becomes an arbitrage strategy that mathematically almost certainly wins.
Noah Smith: Furthermore, estimates of Bitcoin’s energy use suggest that the energy consumption of the network is closely related to the price of Bitcoin. That’s not the case for stocks, houses or gold – none of these assets require increased energy use to support higher prices. This seems to represent a force that will weigh down the price of Bitcoin in the long run, doesn’t it?
Vitalik: I generally think of the interaction of Bitcoin’s demand and supply curves, and the question of how supply is created, as two separate problems. The difficulty adjustment ensures that the number of bitcoins mined is fixed according to the schedule: currently 6.25 BTC are mined every 10 minutes, starting around 2024 to 3.125 every 10 minutes, and so on. This schedule applies regardless of total hashrate or price. So, from an economics point of view, it doesn’t matter that the protocol hands these tokens to miners or core developers. That’s why I don’t buy into the mentality of miners “backing” the value of Bitcoin in some way.
A consensus system that consumes a lot of electricity is not only bad for the environment, but also requires the issuance of hundreds of thousands of BTC or ETH every year. Of course, eventually issuance will be reduced to close to zero, at which point this will no longer be a problem, but then Bitcoin will face another problem: how to ensure the security of the network…
These security motives are also a very important driving force behind Ethereum’s move to proof-of-stake.
Noah Smith: Let’s talk about those security issues. A lot of people seem to think that if a token is to be called a “cryptocurrency,” the protocol that governs the transfer and ownership of that token must be secure. But from the conversation just now, you seem to be more concerned about security, at least when it comes to Bitcoin. Can you expand on the talk?
Vitalik: Efficiency and safety are not separate issues. The core question is: How much security can you buy for every dollar you spend each year? If the security of a system is too low, you can use more cryptocurrency as an incentive to increase security, at which point you have gained security by sacrificing efficiency. In this post I dive into some of the economic reasons why Proof of Stake can be about 20x more secure at the same cost. Basically, being a proof-of-work miner has moderate ongoing costs and entry costs, but being a proof-of-stake validator has low ongoing costs and high entry fees.
It turns out that how secure a network is depends only on the cost of entry , as this is what an attacker has to pay. Therefore, the consensus system of the network should have low ongoing costs and high entry costs, which is what PoS excels at. Additionally, there are differences in how the two recover the network after an attack: in PoW, the network can only be recovered by changing the PoW algorithm, but discarding all existing mining hardware. In PoS, however, the network can own the protocol and only relinquish the attacker’s assets, so the attacker pays a lot, but the ecosystem recovers quickly.
As far as Bitcoin is concerned, I am concerned for two reasons. First, Bitcoin’s security will come entirely from fees in the long run, and the network hasn’t managed to achieve the required level of fee income, so it’s hard to be a potentially trillion-dollar system. Bitcoin fees are around $300,000 per day and haven’t really grown that much over the past five years. Ethereum has been far more successful in this regard, as Ethereum is more designed to support user usage and build an ecosystem of applications . Second, the per-dollar transaction fee offered by proof-of-work provides much less security than proof-of-stake, and Bitcoin’s migration from proof-of-work does not seem feasible. What will users think if the Bitcoin network reaches $5 trillion in the future, but it only takes $5 billion to attack the blockchain? Of course, if Bitcoin does come under attack, I hope they will show a willingness to at least switch to hybrid proof-of-stake, but I expect it to be a painful transition.
Noah Smith: Anyway, your argument about the per-dollar security provided by proof-of-stake makes a lot of sense. Bitcoin’s high energy costs are actually security costs. But let’s talk about why Bitcoin proponents are reluctant to embrace any alternatives other than PoW. Does the idea of proof-of-stake allow large stakeholders to modify the network protocol to their own advantage and rob users of their fees? Proof of Work has created a large class of miners, is there any incentive to protect their ongoing income going forward? Even these miner revenues represent the user’s holding cost.
Vitalik: There is some debate about proof of stake. The most powerful, in my opinion, is the “Costless Simulation” problem. The idea is that in a proof-of-stake network, an attacker could contact a token staker from years ago, buy their old private keys for a very low price (because the tokens have been transferred), and use those addresses to create a different The chain will fork the main chain. In the post-fork vacuum period, the chain’s historical data looks valid. A node that only knows the rules of the protocol connecting to the network from scratch will be unable to tell the difference between the actual chain and the simulated chain provided by the attacker. In PoW, however, creating such a simulated blockchain requires redoing an equal amount of proof-of-work.
Editor’s Note: The PoW mechanism follows the longest chain is the correct blockchain, and attackers need to consume a lot of computing power to forge the longest blockchain. The PoS verifier does not need to perform a lot of calculations, but only needs to take out the transaction from the transaction pool, package it into a block, and finally broadcast it. Therefore, there is no cost to forge a chain as long as the main chain under the POS mechanism.
In a PoS mechanism, this problem is solved by adding a weak subjectivity: nodes need to connect to the network occasionally (eg once a month), and nodes syncing for the first time may need to ask some source they trust ( Centralization is not required) to transmit the correct version of the blockchain. Pledgers must lock their tokens during this time, and if anyone sees a staker supporting two conflicting chains, they can send a transaction to “slash” them, burning most or all of their tokens assets. In the model, it all makes perfect sense. But PoW proponents are uncomfortable with weak subjectivity; they prefer a pure approach where validators only need protocol rules.
Actually, I don’t think purism works in practice. Regardless, validators need a trusted source to provide protocol rules, especially given that validators get software updates to improve efficiency or occasionally fix bugs. And I don’t think the attacks that purists fear are in reality: you have to convince a bunch of people that the most recent block hash is wrong, and that some other hash is something that no one but the attacker can tell if correct. It doesn’t seem 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 this argument is completely false. They mistakenly think that PoW and PoS are governance mechanisms, when in fact they are consensus mechanisms. All they do is help the network agree in the right direction. A block that violates the rules of the protocol (for example, a block that tries to get more reward tokens than the rules of the protocol) will not be accepted by the network, no matter how many miners or stakers support it. Governance is a completely separate process involving users discussing aspects such as BIPs and EIPs, as well as calls from all core developers and coordination with other official bodies, and suggesting improvements. Interestingly, Bitcoin holders (who tend to be the most pro-PoW crowd) should understand this well, as the Bitcoin Civil War of 2017 was a good example of the inability of miners in the governance process. It’s exactly the same in PoS; stakers just enforce the rules and help package transactions.
Compiler’s Note: The Bitcoin Civil War refers to the split in the Bitcoin community over the block size issue in 2017, followed by the fork of another public chain, Bitcoin Cash (its token is BCC, later renamed BCH).
One possible argument is that PoS has greater centralization pressure than PoW, because the nature of digital stake makes it easier to centralize, or because the PoW mechanism involves stakeholders using local power to obtain cheap electricity. These are definitely the things I worry about, although I think people overstate the issue. In particular, at present, Ethereum Proof of Stake has not yet opened up the function of stakers to withdraw ETH. If the stakers participate in the staking in the funding pool, the stake can be sold to someone else who wants to get the funds back at some point, so the funding pool provides a huge competitive advantage in obtaining liquidity. However, when deposits are enabled next year, this will no longer apply.
Another problem with staking right now is that stakers cannot easily switch pools (or switch to separate staking), again due to a lack of withdrawal capabilities, but next year they will be able to. As for the decentralization of miners, I’m just not sure if these highly decentralized small pools are important enough. Mining is a highly industrialized activity, and large mining farms outside the U.S. (i.e. ~35% of global hashing power) seem to have close ties to governments, so PoW censorship resistance is highly contingent in the future. The highly democratized early proof-of-work era is a wonderful thing, and it has greatly helped make cryptocurrency ownership more egalitarian, but it is unsustainable and will be obsolete.
Noah Smith: Let’s really talk about governance. To me, governance seems to have always been the most promising and interesting thing about blockchain technology – a way to eschew tedious business processes and create fluid, ad hoc economic cooperation, especially in the area of cross-border cooperation. I’m a big fan of the science fiction novel “The End of the Rainbow,” where much of the economy is based on this kind of collaboration. But so far, people seem to have a lot of problems with the way this is achieved – in fact, you have blogged a lot about blockchain governance systems that try to eliminate all human judgment and trust. Can you briefly describe your views on how blockchain governance should work?
Vitalik: One of the things that makes blockchains interesting is that they share many properties with many things we’re already familiar with, but don’t quite resemble any of them. Just like companies, blockchains offer purchasable tokens, and holders want it to go up. But unlike a company, blockchain is more like a country, not relying on external authorities to resolve internal disputes. Instead, blockchain is a “judge” who can adjudicate its own problems; 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 in fact , most nation-states have not achieved true independence).
Blockchains are highly open and transparent, as democracies aspire to, and anyone can verify that the rules are being followed. Blockchains have often spawned something akin to religion, allowing followers to inspire a lasting and devout fervor, but their economic components are far more complex than what religions usually do. Blockchain is like an open source software project, with egalitarian ideals and, more importantly, the ability to fork freedom: if the “official” version of the protocol goes astray and violates what some parts of the community believe are core values, the community can revolve around it. Fork their own ideas, and then they can compete with the original protocol for legitimacy.
But blockchains are not the same as open-source software projects: In blockchains, billions of dollars of capital are at risk, and the cost of forking to go wrong is much higher. Just as some argue that the scale of DeFi makes it impossible for Ethereum to have an Ethereum Classic fork, if the cost of a fork is too high, it will act more like a nuclear deterrent than a conventional weapon in governance.
All of this means that the blockchain is a powerful infrastructure that can be used to host the governance logic of other applications, but the blockchain itself is also a complex thing that 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, both parties have strong and different beliefs about the values the protocol should embody, which is ultimately resolved with a fork. Interestingly, both Bitcoin and Ethereum eschew formal governance: there is no specific individual or council or voting mechanism that decides which protocols become formally legal. There have been calls from the core devs, but even then, the rules are not clearly defined, and on anything truly controversial, the core devs often step back and listen to the community.
Of course, people often come out and say that this “anarchist” design looks ugly and needs to be replaced with a more “proper” formal system. But they almost never succeed. It seems to me that our current “unstructured government” actually has a lot of wisdom. In particular, it nicely captures the idea that a relatively small core development team should be able to independently make detailed technical decisions that don’t really affect the core vision , but operating something in depth requires a high degree of philosophical theory , such as rescuing a hard fork event, or switching to proof-of-stake.
Application governance on the blockchain is a different challenge. There is also disagreement over how “forkable” the application is : whether it’s like E Noah Smith, if governance fails, the community can fork with different rules and convince all infrastructure to migrate to the new rules. The stablecoin DAI relies on reserve assets such as ETH, so you cannot safely fork DAI without forking other underlying assets. If the application is forkable, it gives you additional support and you can take advantage of it (as Hive does). If the application is not forkable, then you do need some fully formal governance that you can trust.
For a long time, I have always believed that the current popular way of token-driven governance (governance done by token holders voting) is really not applicable, we need to move to something better, especially something that is not so “financialized” Things”. Token-driven governance naturally benefits the rich, and in the long run there will be many ways to cause the system to collapse. In my post last year, I described a smart contract that in a very user-friendly way allows Token holders automatically accept bribes to vote from the highest bidder in a specific way:
This turns every governance decision into an auction, resulting in only the wealthiest participants having any say, the community pursuing soulless profit maximization, and at worst, causing community wealth to be quickly extracted, and then The project collapsed quickly.
I think the best alternative to token holder governance is some kind of multi-stakeholder governance that tries to formally represent stakeholders, not just tokens. Optimism is doing this with the concept of “citizenship,” which is intended to be distributed to contributors and ecosystem participants, and specifically states that this permission is non-transferable. But we’re still in the early stages of figuring out how this kind of thing works.
Noah Smith: Let’s talk a little more about the alternative forms of human organization that blockchain could enable. I really like your in-depth review of Balaji Srinivasan’s state of the web. Are there any valid attempts to create a “cyber state” with encryption as a component so far?
Vitalik: So far, I think the reason the concept hasn’t really materialized is because there is a fundamental difference between a blockchain ecosystem and a full-blown cyber state. The blockchain ecosystem survives economically by convincing a lot of people to get involved. You only need a few core developers, and even they don’t necessarily have to make great personal sacrifices to live in a “normal” real-world city that looks like any other job. But the cyber state is a deeper thing. The need for people to take the plunge and move to a particular place, maybe not a regular place, comes with big downsides that can only be overcome by the upsides created by the community itself.
I think the crypto narrative is deeply penetrated by “ethics” , they were the core of the ecosystem from 2009-2014, when people didn’t know whether crypto could survive as an industry, the average crypto user had almost no offline crypto social circle, Even legal issues remain uncertain. Encryption, as a continuation of a grand online libertarian movement, is almost regarded as the spiritual successor of PGP, BitTorrent, Tor, Assange, Snowden, etc. These strong ideals act as ideological and moral glue, allowing People make huge sacrifices and risks for space.
More recently, the industry has matured, and with that maturity comes some dilution of ethics-related condemnation. This dilution favors mainstream adoption of cryptocurrencies, and indeed, newer blockchain projects tend to downplay this weirdness intentionally, with the goal of mass adoption. NFTs are expanding the appeal of cryptocurrencies beyond their original users.
But at this point, this way of growing also makes existing blockchains too “skinny” to form a good network state. Ethereum has so many diverse user communities, many of which are deeply divided (e.g. there must be “sober” vs. rationalist arguments, not to mention international ones). There’s a strong consensus mechanism about defending the integrity and operations of the network, as we’ve seen recently with community solidarity around preventing on-chain censorship, but not enough solidarity to form a nation.
Also, attempts by the offline crypto community so far have been terrible. The problem I see is basically that they all use some form of “low taxes” as a slogan, and while from a personal standpoint low taxes are a tempting benefit, it’s really interesting if your goal is to attract people. And the community formed by the low tax slogan is really boring and lame. Network effects are about quality, not just quantity. I think the “cyber nation” has a lot of need for a brick and mortar community oriented towards specific values, and needs to provide a channel to express those values constructively, not just through zero-sum games or twitter wars, which is not the same as escaping America’s high cost The cost of living combined with the needs of the offline community, not just the theoretical despotism of many other powers. But none of the projects I’ve seen so far have done well.
Much of this answer is about culture. Whether we have on-chain land registries, smart contract property rights, or other lesser things. I think the “cyber nation” should try something very different from what we’re used to. For example, I try to downplay the idea of absolute ownership of specific lands, houses, and apartments, and emphasize the economic coherence of the community through something like a “crypto city.” I think innovations like this have more long-term value, and that alone isn’t enough to attract people in the short-term. In the beginning, the concept combined with cryptocurrency and blockchain technology was mostly symbolic, and over time it evolved into something more practical.
Noah Smith: One more question: In that article, you disagree with the importance of the “cyber state” that Balaji described as authoritarian leaders. Do you think your role as Ethereum founder and “spiritual pillar” has been overemphasized by the media and crypto enthusiasts?
Vitalik: I had a lot of hope from the beginning: as Ethereum developed, my influence would slowly dissipate. A lot of amazing works have come to the fore on Ethereum. In fact, I think this has been happening for the past two years. In 2015, I basically did 80% of my research on Ethereum, and I even did a lot of Python coding. By 2017, I was doing far less coding, maybe 70% of my research. In 2020, I’m probably only a third of my research done and very little coding, but I’m still doing most of the “advanced theory”.
But in the past two years, others have started to come up with high-level theories. We have a lot of great new Ethereum influencers like Polynya who has been doing a lot of thought around layer 2 scalability. The Flashbots team has been leading the entire MEV research area. The likes of Barry Whitehat and Brian Gu have taken on the role of zero-knowledge proof technology, while Justin and Dankrad, who were originally hired as researchers, are increasingly showing the ethos of thought leaders.
This is all a good thing! I don’t think the public perception has quite shifted, but I hope that over time people will start to understand that.
Noah Smith: Okay, that’s my last question, are there any projects you’re excited about recently?
Vitalik: I would say that what excites me the most is not any one project, but the way an entire ecosystem of many interesting ideas comes together. It is true on a technical level that Ethereum is about to merge, and major improvements in blockchain scalability, usability, and privacy will all come soon after that. The same is true at the level of social and political ideas, where many ideas around decentralized organizations, radical economic and democratic mechanisms, Internet communities, etc. are maturing.
Advances in biotechnology and artificial intelligence have been astounding, far from the frontiers of cryptography. Some might say that this may be an exaggeration. We’re starting to understand what the politics and technology of the 21st century will look like, and how each of the parts we’re working on will fit into that scenario.
By 2022, cryptocurrencies will finally make sense. Many mainstream organizations and even governments are using it as a way to send and receive payments, and I have a vague sense that other applications are coming soon. The future still feels like a lot of uncertainty, but we have a lot more perspective on how this will all play out than before.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/conversation-with-vitalik-pow-will-eventually-turn-to-pos-token-driven-governance-is-a-backward-model/
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